A number of court injunctions have stopped Luiz Inacio Lula da Silva from taking a job in Rousseff’s cabinet, dashing hopes that the former president would use his political abilities to rebuild the government coalition and defuse the impeachment threat.

The decision to block Lula’s appointment “will deprive Rousseff’s government of a crucial power broker capable of rallying her base,” Neil Shearing, chief emerging market economist with Capital Economics, wrote in a note to clients. “Her term in office looks increasingly likely to be curtailed.”

The first injunction against Lula’s nomination was issued by a federal judge just one hour after his swearing-in ceremony on Thursday. It was later struck down by a higher-court judge but the legal battle is set to continue, with several others cases being considered all over the country, including in the Supreme Court.

Rousseff said her government respects the courts but that the judicial system “can’t be politicized.” She lambasted federal judge Sergio Moro’s decision to release phone recordings that critics say show she appointed Lula to shield him from a corruption probe.

According to Brazilian legislation, only the Supreme Court can probe, indict or imprison presidents and cabinet members.

Eoin Treacy's view

With the kind of protections from prosecution enjoyed by the President and cabinet of Brazil there is no chance Rousseff will resign of her own accord. To do so would immediately result in her being indicted for her role in the Petrobras bribery scandal as well as a number of other payment schemes that have come to light since she became President. That means impeachment is the only route to a new government. 

Eduardo Cunha lost the presidential election to Rousseff and he must be salivating at the chance to take the reins, in the event that next month’s impeachment is successful. The resolution of such a long running scandal would leave him with ample potential to institute widespread reforms and blame the current administration for the extent of the cuts required. The Rio Olympics due to start on August 5th also potentially offers a news frenzy that would detract from any reform decisions that need to be made. 

The currency has benefitted from the rebound in oil prices and a sustained move above BRL3.80 would be required to reaffirm Dollar dominance. 

The iBovespa Index pushed through the psychological 50,000 level this week and a sustained move below 48,000 would now be required to question medium-term scope for additional upside. 

The Blackrock Latin American Investment Trust is trading at a discount to NAV of 8.4%. It has a 44.8% weighting in Brazil and a 41.5% weighting in Mexico. It found support this week in the region of the trend mean and a sustained move below 300p would now be required to question potential for some additional upside. 

The Mexican Index rallied this week to test the upper side of a four-year range and a clear downward dynamic would be required to check potential for additional upside.